November 17, 2015

The substandard standards of distribution theory

Comment on ‘Beyond the standard explanation’

Blog-Reference

“Everything can be ‘explained’ if we place no restrictions on what we mean by ‘explanation’.” (Blaug, 1994, p. 123)

Everything can be explained by the actions of benevolent/malevolent entities. This is what myth, religion, ideology, and folk psychology have done since time immemorial. This kind of explanation consists essentially of storytelling.

Scientific explanation is different and consists of the true theory. We know from history that it is by no means a simple task to develop the true theory. Storytelling is much simpler and good enough for almost all practical purposes.

In economics things are rather straightforward: we can be sure that neither Orthodoxy nor Heterodoxy has come close to the true theory — with truth defined as satisfying the criteria of material and formal consistency (Klant, 1994, p. 31).

The standard explanation of distribution consists of the marginal principle. This explanation is derived from the following premises. “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to  equilibrium states. (Weintraub, 1985, p. 147)

Marginalism follows logically from the green cheese behavioral assumption of constrained optimization. What can be said with certainty is that the set of five hard core propositions has proven its worthlessness. More specifically, standard distribution theory is false.

From this in turn follows: in order to develop the true distribution theory one has first of all to fully replace the premises of marginalism HC1 to HC5 with a superior set of foundational propositions.

To say that ‘a corporate and financial elite has been able to influence the rules by which the economy runs’ is essentially a bad-guy/good-guy story that satisfies most peoples’ need for an explanation. From the scientific viewpoint, though, this ‘theory’ is not significantly better than the marginal theory of distribution.

The root defect of all distribution theories is that the representative economist cannot even tell the difference between income and profit (2014).

Egmont Kakarot-Handtke


References
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepetant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, pages 109–136. London, New York, NY: Routledge.
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL


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ICYMI (comment on mcbockalds Nov 19)

I am saying that there is no such thing as behavioral laws. There are, of course, structural laws which have objective content. For the difference and the First Economic Law as an example see the post ‘Prediction does not work? Try retrodiction first

Since Jevons/Walras/Menger economics is dealing with the false type of laws.


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ICYMI (comment on mcbockalds of Nov 21 on Nov 22)

(i) There is, of course, no such thing as a behavioral law of supply and demand. To accept the standard supply-demand-equilibrium model as an explanation of how the market system works is a sure indicator of abysmal scientific incompetence. Yet, there is a structural law, see the working paper ‘The Law of Supply and Demand: Here It Is Finally’, see also ‘How to Get Rid of Supply-Demand-Equilibrium’.

(ii) The First Economic Law is a structural law. You ask ‘is it something like an accounting identity?’ as if this was something disreputable. It is important to stress with a view to the ongoing mathiness discussion that accounting is the natural mathematics of economics and the essential precondition of empirical testing. So the whole notion of economics as a science depends crucially on proper accounting. The fact of the matter is, though, that economists even messed up the elementary mathematics of accounting. For details see ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’, see also ‘Why Post Keynesianism Is Not Yet a Science’.

(iii) The successful implementation of rules and regulations presupposes an understanding of how the economy works, otherwise they are ineffective or even counterproductive. There is no use to discuss about rules, regulations or policies with the representative economist who neither understands the Profit Law nor the Law of Supply/Demand nor the elementary mathematics of accounting.

(iv) Finally, note well, that David Ruccio speculates “the economic elite wanted both more surplus and the ability to keep in their own hands more of that surplus” while it is pretty obvious that he has no idea of what the difference between surplus, profit and income is. To get out of the cul-de-sac of behavioral second-guessing and folk psychology see ‘Profit for Marxists’.